What are Shares and Who are Shareholders?
Shares are the units into which the absolute share capital of a firm is split into or divided into. Therefore, the share is a fractional portion of the share capital and comprises the ground of ownership interest in a company. The persons who contribute money through shares are called shareholders.
The amount of authorised capital, together with the number of shares in which it is split is mentioned in the Memorandum of Association but the divisions of shares in which the enterprise’s capital is to be split along with their specific obligations and rights, are recommended by the Articles of Association of the company. As per The Companies Act, an enterprise can issue 2 types of shares :
- Preference shares
- Equity shares (also called ordinary shares)
What are Preference Shares?
Preference shares, more commonly known as preferred stock, are shares of an enterprise’s stock with dividends that are paid out to the members before equity shares dividends are circulated. If the enterprise enters insolvency, the members with preferred stock are designated to be paid from company assets. Most of the preference shares have a fixed dividend, while normally do not. Preferred stock shareholders do not possess any voting rights, but equity shareholders typically do.
Features of Preference Shares :
- Preference shares are a long-term source of finance
- The dividend payable on preference shares (PS) is usually higher than the debenture interest
- Preference shareholders (PSH) get a fixed rate of dividend regardless of the volume of profit
What are Equity Shares?
Equity shares were earlier called as ordinary shares. The shareholders of such shares are the authentic owners of the enterprise. They possess voting right in the huddles of holders of the enterprise. They have a command over the working of the enterprise. Equity shareholders are given dividend only after paying it to the preference shareholders.
Features of Equity Shares :
- Equity share capital remains with the company. It is given back only when the enterprise is closed
- Equity shareholders possess voting rights and select the management of the enterprise
The above mentioned is the concept that is explained in detail about Nature and Classes of Shares for the Class 12 Commerce students. To know more, stay tuned to BYJU’S.